We’ve got to talk about Super

Do Kiwis know how lucky they are to have New Zealand Superannuation (NZS)?  Probably not – and that’s no wonder.  It’s a hard road finding commentary about retirement income that even mentions NZS, let alone praises it.  An honourable exception can be found here.

NZS is a superior scheme, but questions about its affordability have cropped up again recently.

There are at least two ways of looking at this affordability issue.

According to figures on the Treasury website, this year’s net expenditure on NZS will be 4.2% of GDP.  In 2059/60 it will be 6.4% once drawdowns from the New Zealand Superannuation Fund are taken into account.  This compares with a projected OECD average (gross) expenditure of 11.3% in 2060. So – easy peasy – NZS will remain relatively affordable.

But in 2016, an extra 2.2% of GDP is equivalent to around $6 Billion.  If we had to meet the additional cost of NZS today, a projected government surplus of $1.8 Billion would become a deficit of around $4 Billion (roughly the amount spent on “Law and Order”).  Funding this deficit would require extra borrowing, or tax increases, or diversion of expenditure from somewhere else in the budget.  As things stand, these will be the options faced by New Zealand’s Minister of Finance in forty years’ time.

From this perspective, over the long term and in its current form, NZS is probably unaffordable.

If we could grow the economy at a faster rate than is currently projected, the problem might melt away.  But we are very unlikely to land on this “Get-Out-of-Jail-Free” card.

To be fair to our children and grandchildren, we need to find ways to reduce the cost of NZS, while preserving its best features.  Happily, there are ways to do this.

The Retirement Commissioner is about to report on her three-yearly review of retirement income policies, and has already signalled her recommendations. Some of these could work, while others look less likely.

One of the Commissioner’s more contentious ideas is to increase the residency qualification for NZS from ten to 25 years “in line with OECD countries”.  It will be interesting to learn the rationale for this measure, how much money it would save, and with which OECD countries comparisons are being made.

You see, no other country’s basic pension is like NZS.  Many others are contributory-type schemes based on years in the workforce. NZS is paid for directly out of taxes (Pay As You Go).  Is the Commissioner confusing the two systems?

Also, NZS is very good at preventing poverty among older people and helping them to participate fully in society.  A 25-year residency criterion would inevitably result in increases in poverty among sections of the immigrant population (and remember, 25% of New Zealanders were born overseas.  We’re not talking about small numbers).  A “them and us” division would undermine the social cohesion that NZS currently helps to build.

Retirement income policy is complicated.  It’s not just about economics, as can be seen from the volume and tone of the comments at the bottom of the Stuff article on the Commissioner’s proposals.  There are values at play and moral judgements to be made.  Long John will be following with great interest the progress of this year’s review, and will have more to say in future blogs.